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After receiving (my brother and I) equal settlement checks

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from the proceeds of the...
After receiving (my brother and I) equal settlement checks from the proceeds of the settlement of our family house, the total of these shares is to be distributed equally to my two brothers and me. What is the best way for my brother and me (financially) to send my other brother his share. brother's share
Submitted: 5 years ago.Category: Tax
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6/1/2012
Tax Professional: jgordosea, Enrolled Agent replied 5 years ago
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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Greetings,

 

More background will help to give a more accurate answer.

 

Is this an estate settlement ? Is one of you the executor (aka personal representative)?

 

If not an estate, what sort of settlement?

 

If the will (or other document) said equal shares to three brothers, why did only two get checks from the proceeds?

 

When you ask "what is the best way" are you asking about tax consequences and reporting income?

 

Thank you for the information.

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Customer reply replied 5 years ago

Settlement of family house. House was in mother's name, my brother, and me. Inheritance taxes were paid at settlement and the balance of proceeds from the sale was divided equally between my brother and me. My other brother lives out of state (Colorado) and we would like to send him hs share of the proceeds. What is the best way for us to handle this (tax consequences and reporting income)

Tax Professional: jgordosea, Enrolled Agent replied 5 years ago

Hello again,

 

1. Did you and your brother actually own (having the benefits and responsibility of ownership) one third of the house or was it just put in your names for convenience?

This may determine if income tax is due on the sale of the part of the home that you and he may have owned.

2. If you and he did own some, how was it acquired (bought, gift, inheritance)?

How property is acquired can determine if, and how much, income tax is due.

 

3. Did your mother's will say that each brother is to inherit one third or do you and he just want to give part to the third brother?

This does matter since inheritance and gift are a but different.

 

4. Was the house retitled to you and your brother after your mother's death so that is why the checks for proceeds were paid to you?

5. Or, was the house held as joint tenants with rights of survivorship (so it transferred at death to you two)?

 

That is, is it you and he that sold the house or was it the estate that sold the house?

 

Honestly I am not trying to make this more complicated (than it already is); but the details do matter in order to give to you the general rules that do apply to your situation.

 

Thank you.

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Customer reply replied 5 years ago

Several years ago (about ten) my mother had the house legally changed from just her name to include her name, my brother, and my name in case anything might happen to her.My other brother lives out of state. Six or seven years ago, my mother needed 24/7 care and she went into a nursing home. The house was leased and the proceeds were used to take care of her needed expenses, as well as maintenance, taxes, fees,and upkeep of the house. My mother passed away in March of 2011 and we placed the house on the market to sell in the fall of 2011. At settlement, we were responsible for paying the inheritance tax on her share of the house (which we did). My mother's will stipulated that each son (3) was to receive an equal share.

Tax Professional: jgordosea, Enrolled Agent replied 5 years ago

Thanks for the information.

 

Sorry to hear of the loss of your mother.

 

From what has been stated it seems that your mother gifted 1/3 of the house to you and your brother about ten years ago.

For a gift your cost for the sale is the same as what the donor (your mother) paid.

 

Presumably each of you (the three owners) were reporting one third of the rental income and expenses on your individual income tax returns while it was leased.

Please correct me if this is wrong (such as if it all was reported by your mother)

 

Still not sure about:

4. Was the house retitled to you and your brother after your mother's death so that is why the checks for proceeds were paid to you?

5. Or, was the house held as joint tenants with rights of survivorship (so it transferred at death to you two)?

 

That is, is it you and he that sold the house or was it the estate that sold the house?

 

Once the facts are established the tax treatment will follow based on the facts.

 

Thanks for your patience.

 

 

 

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Customer reply replied 5 years ago

I believe that house transferred to us at death. We did not do a retitlement, and all activity involving the sale of of the house (with a licensed realtor) was done with our(both) signed permission.

Customer reply replied 5 years ago

we we're told at settlement to keep our settlement papers to report capital gains at tax time next year ( is that correct). What about my brother share ( in the will).

Tax Professional: jgordosea, Enrolled Agent replied 5 years ago

Hello again,

 

If you have not spoken to the attorney that assisted with the estate, it would be advisable in regard to the provision about the three brothers getting an equal share of the house.

As it has been described, it seems that you and your brother were each gifted one third of the house ten years ago. But, that means there was only a one third owner share to be split three ways by the will.

A one third share equally split is a one ninth share which is the portion the third brother was willed.

State law, rather than the federal tax code, is what determines how ownership interest is determined and when it passes.

 

When property is inherited, the beneficiary can use the market value on the date of death as the cost to figure gain or loss on the sale. For example, the 300K value house bought for 60K that is willed to three brothers would use the 300K and figure and gain or loss using that amount. Selling that house for 300K results in zero gain for the three brothers.

 

When property is gifted, the recipient uses the cost of the donor to figure the gain or loss. A house bought for 60K would use 20K for the value of the gift of one third of that house. If that house was sold for 300K each one third owner would have 80K of taxable gain (100K-20K = 1/3(300-60)).

 

Both gift and inheritance can happen to the same house. Using the same values in the above example (300K at date of death and 60K cost), after gifting away two thirds if one of the one third owners wills her share to three others only her one third gets raised to the fair market value at date of death.

In that case there is one third valued at 100K and the other two brothers have a one third with cost of 20K at date of death. For figuring gain the 100K is split between the three heirs so the out of state brother has a one ninth interest in the house with cost of 33.3K ( 1/3 of 100K) and the two brothers that had gifts have 53.3 K cost on what is now a 4/9 share of the house.

For a sale at 300K, the gain reported would be zero for the out of state brother. (1/9 of 300K= 33.3K sales receipt and 33.3K cost)

For the sale at 300K the gain reported by each of the brothers that had a gift of one third would be 80K (4/9 of 300K = 133.3K sales receipt and 53.3K cost (20K from gift plus 33.3K from inheritance).

 

Of course, the brothers with the one third gift share may still decide to give the out of state brother one third of the total receipts (1/3 of 300K) but the that does not change the tax consequences of having received one third of the house as a gift and being required to use the donor's cost to figure gain on the sale.

 

Sorry this is as simple as it can be demonstrated; so several items have been left out of the example. Costs of selling (and taxes) would reduce the 300K receipts and reduce the gain of each brother (even possibly creating a loss for the out of state brother).

Additional cost or improvement may have happened after the one third gift and that cost would add to the one third of the donor cost of 20K and would reduce gain.

Depreciation that was allowed while the property was rented would reduce the cost basis and increase the gain.

 

There is much to consider in this situation; so please ask if you need clarification.

Thank you.

 

 

 

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Customer reply replied 5 years ago

I,m a little confused.House sold for $235,000. (minus $5,000 sellers assist, taxes, fees, inheritance taxes, and equity loan) net balance was $155,750.00. Two checks of $77,875.00 for my brother and me. What is our next step for sending monies to our brother in Colorado. We planned to send him 1/3 of $155,750.00. we never expected to send him 1/3 of 1/3. Also, house was purchased in 1950 for $10,00.00. Never remortgaged, never sold until 2012.

Tax Professional: jgordosea, Enrolled Agent replied 5 years ago

Hello again,

 

No problem with being a little confused as it is a bit complicated.

 

For an inheritance the cost that is used for figuring gain is the fair market value on the date of death. When there are no prior gifts the entire cost to the beneficiaries is the value at date of death. No gain or loss is common for inherited property not gifted.

If two thirds had been gifted only one third can get the increase to value at date of death in cost basis.

 

When a gift is made the cost of the donor carries to the recipient.

If the house was bought for 10,000 and no improvements were made before a gift of one third then each 1/3 has a cost of 3333. That cost does not change with the death of the donor.

 

For figuring the actual gain the loan payoff is not considered. It is not the net check that is the proceeds from the sale for tax purposes but the sales price less selling expenses.

Neither borrowing or paying off loans is considered for income tax purposes.

 

As an example I will use 210,000 net sales proceeds after sales expenses and will presume that is the value at the date of death.

 

One third of the house would have a value of 70,000 and a cost for figuring gain or loss of 70,000 since we said that the house did not gain or lose value after the date of death and before the sale.

 

The gifted thirds also sold for 70,000; but must keep the donor cost for figuring gain so the gain is 70,00 - 3,333 = 66,667 for each. Long term capital gain rates of 15% for federal income tax will apply.

 

You can send your brother however much you wish to send; but some of it may be the

inheritance and the rest would be a gift from you. ( Gifts of more than 13,000 in one year from one person to another will require a federal gift tax return on Form 709 but no tax will be due and nothing will be paid - it is an information return unless more than $5 million is gifted in your lifetime)

 

Please check with the attorney to be sure that under Pennsylvania law that 1/3 of 1/3 is what was willed. That is a matter of state law and I am not an attorney.

There is also a possible issue of whether there really was a gift, transfer of property and ownership by you and your brother ten years ago, or if it was not an actual gift only listing on the title for convenience and ease of management

.

It would be far better for income taxes if a gift was not technically made (and state law is important) so your mother owned 100% of the house at her death and all of the cost can raise to the value at date of death.

 

There is much information to consider; so please keep asking if you need clarification.

Thank you.

 

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Customer reply replied 5 years ago

I'm sorry to keep bothering you. The change of ownership was done for convenience and management in case of complications with my mother's health. at settlement we paid the state inheritance tax on only one-third of the actual selling price ($235,000.00): technically my mother's share of the house. As the will reads my brother's share would be 1/3 of 1/3. We always expected to share the proceeds from the settlement equally. Would we follow the writing of the will and make up the difference as gifts? If so, is that a deduction for us and a non-taxable income for my brother in Colorado? What would be the maximum we could send as" gifts" to my brother. Also, should a escrow account be necessary for such gift giving? I know we're staying up late trying to resolve this, but maybe this answer will resove my questions until tax time.

Tax Professional: jgordosea, Enrolled Agent replied 5 years ago

Hello again,

 

Gifts to an individual are not a deduction to the giver and are not taxable income to the recipient.

 

No special account needs to be set up. It may be better to send two checks - one for the inheritance and one (or one each from you and your brother for the gifts if you each give)

 

Gift tax is only due and payable after the $5 million lifetime limit of gifts has been given.

 

Although a gift tax return is required when more than the $13,000 annual amount that can be given each year from one person to another is exceeded; that gift tax return on Form 709 just keeps track of how much of the $5 million lifetime has been used. The amount over the 13,000 annual limit uses up some of the $5 million unified credit.

 

Form 709 is available at http://www.irs.gov/pub/irs-pdf/f709.pdf There is no payment of tax with that gift tax return until the value of taxable gifts given is more than $5 million.

 

See http://www.irs.gov/publications/p950/ar02.html#en_US_publink100099451 for more details.

 

Please ask if you need clarification.

Bonus is welcome if you feel it is earned.

Thank you for your consideration.

 

 

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